IFO Higher But Euro Stays Still Ahead of FOMC

The IFO survey surprised to the upside today printing at 105.3 versus 104.5 expected and 104.9 the month prior. The better than expected reading was due in part to a sharp decline in oil prices and strong order flows for the industrial sector.

Although IFO' s Gernot Nerb in the post release conference stated that the data does not support a move beyond the 3.5% level by the ECB, the news is bound to spark speculation that the ECB may now go to 3.75% before year end as EZ demand remains robust.

After briefly trading to 1.2680 in the immediate aftermath of the release, the EUR/USD remained stationary for the rest of the night as traders turned their focus to the FOMC decision due 18:15 GMT. While the market expects no change from the Fed today the true interest of the bulls and the bears is centered on the tone of the post announcement press release.

If the Fed explicitly acknowledges inflation risks, the dollar may strengthen on knee jerk speculation that an additional rate hike might be in the cards. If, however, the Fed simply repeats the language of the prior statement the reaction is likely to be dollar negative, as most traders have already factored in a more hawkish posture from Fed officials

Regardless of the wording of the FOMC statement the cold hard facts are on the side of the euro for the time being. European data including tonight's IFO readings shows the recovery remains robust allowing ECB to raise rates further without too much protest from EU finance ministers and politicians.

On the other hand recent US releases including yesterday's large decline in Richmond Fed index suggests that the contraction in housing is taking its toll on US economic growth. So far the fall in gasoline prices has simply served as an offset to the drop off in demand from lower house values without spurring further US growth.

The dollar bullish case can only be made if today's Existing Home Sales numbers show a surprising resiliency. Therefore while all eyes are set on the Fed today, the true market moving event may occur four hours earlier with the release of the housing numbers.